Mar 30 Bringing FDI to Iran: 3 Key Tactics of Business Diplomacy

Back in November, as the nuclear negotiations between Iran and the P5+1 nations seemed headed for an agreement only to result in a second extension, I wrote a piece about how the business community in Iran and abroad will need to “steward” a deal after it is signed.

Now that a preliminary agreement seems just moments away, laying the groundwork for a full agreement to be defined by June 30th, it may be time to revisit the notion of stewarding a deal.

My fascination with the question arises from a simple assessment; the deal is not an end in itself, it is merely a means to a whole range of activities that have been long overdue for Iranian businesses and the economy they serve.

The development of Iran’s economy since the Islamic Revolution in 1979 has been defined by attempts at self-sufficiency—a quality seen among most governments that have tried to cobble together a state in the aftermath of revolution.

In the pursuit of self-sufficiency, a wide range of government programs or initiatives came into effect. These included social policies, such as the expansion of the educational system across primary, secondary, and tertiary education, which boosted literacy rates nationally and the overall competitiveness of Iran’s workforce. It also included industrial policies, such as the development of domestic manufacturing capacity through import substitution industrialization.

The total consequence of these policies— though they were never instituted perfectly—has been to position Iran as a country with decent capabilities across nearly all the key factors that impact economic growth.

However, one key element has been largely missing. As a result of international sanctions and a persistently negative political climate, Iran has remained disadvantaged in its attempts to secure foreign direct investment (FDI). When compared with its regional neighbors, Iran has been left behind.

Over the last 10 years, Iran’s annual FDI inflows, measured as a percentage of GDP, have had half the magnitude of inflows in Turkey, and a third of the magnitude of inflows in the United Arab Emirates. In 2009, Iran’s FDI as percentage of GDP was a staggeringly just one-tenth of the levels seen in Qatar and Saudi Arabia.

Foreign direct investment, net inflows (% of GDP)

Although many reports have noted an uptick in trade relations with countries like China, India, and Brazil in an a response to sanctions, there has not been a marked improvement in FDI inflows over the last 10 years.

The stagnant figures are particularly surprising when one considers that Iran’s economy is perhaps the most diverse, mature, and demand-driven economy in the region, even surpassing Turkey in some key metrics.

Without an influx of foreign capital and the related impact on economic growth, Iran will remain unable to realize its economic potential. In this regard, a nuclear agreement will have two important impacts for the future of FDI in Iran. First, it will enable policymakers to begin the hard work of road-mapping and then enacting sanctions rollback. Second, it will markedly improve the political position of Iran in the international community, reducing the perception of the country as a rogue state or pariah.

However, both of these impacts are essentially superficial—they will not necessarily increase levels of FDI. Rather, in a post-deal scenario, Iranian businesses will have the new opportunity to pursue investments or partnership arrangements with foreign firms in a more concerted fashion.

The emphasis here is on being active. Because of the particularly longstanding isolation of Iran from international markets for goods, services, and capital, Iranian businesses cannot afford to remain passive and assume that opportunities will land on their doorstep.

Therefore, “stewarding” the deal means making the necessary strategic, operational, and tactical decisions for business development in order to capitalize on the initial improvement in the sanctions and political landscape. If Iranian businesses, working together with foreign firms, can create success stories on the ground—it will become significantly more likely that a the deal will become the basis of a larger détente.

So what are the key strategies, operations, and tactics to bring to bear? First and foremost, stewarding a deal means engaging in “business diplomacy.”

As I described in my November piece, “business diplomacy can be defined as the establishing and sustaining of positive relationships (by top executives or their representatives) with government representatives and non-governmental stakeholders with the aim of building legitimacy (safeguarding corporate image and reputation) in a difficult business environment.” This definition is taken from the excellent scholarship of Professors Raymond Saner, Lichia Yiu, and Mikael Sondergaard, who developed the concept of business diplomacy about 15 years ago.

If the strategy for Iranian businesses is to seek increased degrees of foreign investment and engagement, then business diplomacy will be a key operation. Subsequently, team members in the organization need to be able to deploy three main tactics as part of business diplomacy operations: brokerage, diffusion, and collection action.

The goal of brokerage is to enable Iranian businesses to earn a place at the negotiating table, whether that means earning access to high-level meetings with potential partners and investors, or participating in industry events overseas. Brokerage entails linking the currently unconnected groups or entities (Iranian businesses and international firms) by finding shared challenges and common ground. These linkages should extend both within and without the private sector—meaning that relations with government agencies, industry bodies, and watch groups overseas will also be important for Iranian firms. Executives will need to develop new skills to handle these relationships.

Once links are formed, the next tactic is diffusion, which is about Iranian firms beginning to have some influence on the overall economic agenda in Iran, the Middle East, and even global markets. This kind of influence is earned through claims making. Intelligent communications, public relations, and advocacy will allow for the perspective of Iranian firms to diffuse among new stakeholders. Business leaders should strive to be transparent and engage the public through interviews, conference engagements, and philanthropy among other initiatives.

Finally, when links have been formed and perspectives have been shared, Iranian firms and foreign counterparts will hopefully engage in collective action. At a basic level, collective action can represent specific joint-venture projects with multiple stakeholders. At a broader level, collective action will be necessary if Iranian businesses want to shape the future of the country. Only through collective action will businessmen and women emerge as important civil society leaders.

The tactics of brokerage, diffusion, and collective action each deserve their own detailed exploration, and this website will feature such analysis by expert authors in the coming months.

In the meantime, as we anticipate a tentative nuclear agreement, I hope that business leaders in Iran and abroad are galvanized for the incredibly difficult, but also incredibly rewarding work ahead of them. Without their efforts, a nuclear agreement will have little impact on the quality of life enjoyed by the average Iranian. But through enterprising activities such as job creation and the innovation of new goods and services, the promise of a nuclear deal can really come to life.